Taxation of Real Estate Investment Trusts (REITs) and Shareholders

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Top Takeaways

1: There are Three Types of REITs

REITs generally fall into three categories:  equity, mortgage, and hybrid.  Most are equity REITs which typically own and operate income-producing real estate.  Mortgage REITs, on the other hand, provide money to real estate owners and operators either directly, in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities. Hybrids are a mix of equity and mortgage REITs.

2: REITs have a number of basic requirements

The basic requirements of the REITs are: it must have a centralized management; transferable shares; be beneficially owned by at least 100 persons; and 50 percent of the trust is not owned, directly or indirectly, by 5 or fewer individuals.  If it were not a REIT it would be a domestic corporation, and it must not be a financial institution or insurance company.  The REIT must have a calendar year Tax Year and make an election to be a REIT.  Lastly, it must satisfy the income and assets tests, and the distribution of earning and profit requirements.

3: REIT must distribute over 90 percent of taxable income

Each year the REIT must distribute an amount that equals or exceeds 90 percent of the REIT taxable income, excluding net capital gain, plus 90 percent of net income from foreclosure property less the tax imposed, minus any excess noncash income.

A REIT may be subject to tax on the following amounts: undistributed REIT taxable income, undistributed net capital gain, income from foreclosure property, and other specified income.

4: REIT shareholders are taxed on dividends

Shareholders of REITs will be taxed on any dividends to the extent of the REITs earnings and profits.  Any dividends of capital gains are taxable as long term capital gain for the shareholder, regardless of the holding period.

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